Looking for marijuana ETFs? These are the best bets for American investors

Last week, marijuana exchange-traded funds (ETFs) and stocks rallied after Canada legalized recreational marijuana. Obviously, that news is more pertinent to Canadian investors. Not only did Canada legalize recreational marijuana, that country is home to more marijuana ETFs than are listed here in the U.S.

For the time being, the universe of U.S. marijuana ETFs is sparsely populated. To be precise, just two funds trading in the U.S. are credible marijuana ETFs. There are reasons why more marijuana ETFs are not coming to market in the U.S. and why the existing products face some challenges.

Notably, custodian banks in the U.S., which are an essential part of the ETF ecosystem, have been reluctant to hold marijuana stocks. Although many of the mainstream, well-known marijuana stocks are Canadian-based, U.S. banks do not want to run afoul of regulators by holding those stocks, even if those holdings are accrued for the purposes of a marijuana ETF.

Additionally, Attorney General Jeff Sessions is an ardent opponent of legalized marijuana, indicating it could be a while before marijuana ETFs are trading in the U.S. One catalyst could be President Trump’s preference for allowing the states to chart their own course regarding legalized marijuana, which could pave the way for enhanced legalization.

Here are the two primary options U.S. investors have among marijuana ETFs.

AdvisorShares Vice ETF (ACT)

Expense ratio: 0.75% per year, or $75 on a $10,000 investment.

The AdvisorShares Vice ETF (NASDAQ:ACT) skirts some of the thorny legal issues pertaining to marijuana ETFs by not actually being a dedicated marijuana ETF.

“ACT will try to generate long-term capital appreciation by companies that derive at least 50% of their net revenue from tobacco and alcoholic beverages and companies that derive at least 50% of their net revenue from the marijuana and hemp industry or have at least 50% of their company assets dedicated to lawful research and development of cannabis or cannabinoid-related products,” according to ETF Trends.

So while ACT is not a dedicated marijuana ETF, it does tilt toward the more sinful side of the usually stodgy consumer staples sector. Currently, 20% of ACT’s holdings are classified as cannabis related.

ACT is off about 3% this year, which is actually impressive when considering that consumer staples is the worst-performing sector in the S&P 500 and that tobacco stocks are among the sector’s most egregious offenders.

ETFMG Alternative Harvest ETF (MJ)

Expense ratio: 0.75% per year, or $75 on a $10,000 investment.

Obviously, the field is small, but the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) is the king of US-listed marijuana ETFs. As has been widely reported, MJ came about despite regulatory hurdles because it previously existed as an ETF delivering exposure to entirely different asset class.

MJ holds 38 stocks, nearly 62% of which are Canadian companies. In the ETF’s favor are two holding-level points. First, MJ’s Canadian components trade on major exchanges there. Second, some are gaining U.S. listings on major exchanges, such as Nasdaq or the New York Stock Exchange.

MJ has nearly $387 million in assets under management, which is off its highest levels of the year, but enough to confirm there is an appetite for marijuana ETFs in the U.S.

“The potential for broad investment in the space, including through ETFs, could have a positive impact on all the related stocks, as was the case during Q4 2017,” according to IHS Markit.